Domestic brokerage firm ICICI Direct has updated its rating on Sterlite Technologies, a leading telecommunications infrastructure player, from "hold" to "buy." The brokerage has a 12-month target price of ₹220 per share on the stock, indicating an upside of 22.90% from its previous closing price of ₹179.
The stock has shed 43.59 percent from its 52-week high of ₹317, hit on December last year. It has fallen around 33.27 percent in the last 1 year and is down 37.79 percent year-to-date (YTD).
ICICI Direct, on the other hand, is bullish on the stock, citing the company's unique position to benefit from the 5G/FTTH deployment cycle both domestically and globally. The brokerage believes that with a renewed focus on ramping down/exiting loss-making segments and focusing on improving service segment profitability, STL will likely see an improvement in earnings momentum ahead.
According to the brokerage, the key upside triggers for the stock include a transition from products or services currently offered to solution providers, demand offtake from expanded and overall fiber/cable pricing trajectory, and improvement in leverage, which has increased due to expansion and stretched working capital in the services business.
STL market share (ex-China) grew to 11% in H1FY23 vs. 9% in FY22, led by a sharp increase in OFC market share in the Americas, where it enjoyed 14% market share in H1FY23 vs. 7% in FY22, it added.
"We expect H2FY22 revenues to remain healthy, driven by continued robust capacity utilisation in the product segment as well as improved traction in the services business." "We built in margins to recover to 15% in FY24 with improved margins in services (led by project mix) and reduced losses, led by the exit of the wireless software business," ICICI Direct said.
The order book was at ₹1,1697 crore (vs. ₹1,1207 crore in Q3), of which the O&M portion was 22%. The company secured new orders worth Rs. 3,199 crore, the highest order intake in the last 3-1/2 years, the brokerage noted. It has also closed an order book of ₹941 crores, majorly in the services and wireless businesses, in line with its focus on executing projects at the desired level of profitability, it said.
In line with its strategy to focus on selective segments, the company has divested the IDS business in Q2 FY23 to Hexatronic Group. IDS operated in a niche segment of inside data centre connectivity and containment solutions. The initial consideration for an 80% stake is about 9 million pounds, according to the ICICI Direct.
The earn-out consideration is based on actual EBITDA achieved for the year ending CY22. The company recognised a gain of ₹25 crore in Q2 over ₹117 crore in book value. STL has also ramped down its wireless business with no additional investments in capital and manpower from Q4 FY23.
The company expects operating profit to go up by ₹40–50 crore per quarter from Q4FY23 onwards, the brokerage added.
Meanwhile, in Q2 FY23, STL reported a 58.37% fall in its consolidated net profit to ₹44 crore, compared to a net profit of ₹105.7 crore in the corresponding quarter of last fiscal year. However, sequentially, it performed better during the quarter, as it had a net loss of ₹20 crore the quarter before.
The operating revenue for STL increased 17.2% YoY to ₹1,768 crore in the most recent quarter. When compared to the June quarter's figures, the revenue growth was 12 percent higher.
The company's expenses were higher during the quarter, at ₹1,595 crore, compared to ₹1,244.7 crore in the previous quarter, affecting the company's operating profit.
India's much-awaited 5G roll-out has started and will strongly hinge on fibre, with telcos planning to lay about 2,00,000 cable kilometres and spend between USD 1.5-2.5 billion on fibre roll-out in the next 2-3 years.
"STL has already made strategic investments for this demand cycle and is playing a pivotal role in this ongoing decade of network creation, both in India and internationally," the company said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.